Navigating the False Advertising Claim

Commercial claims for advertising liability are trending upward. There is a marked increase in the channels for promoting goods and services. Because of this, product manufacturers and service providers may find themselves at an increased risk when customers and clients don’t feel like they are getting what they paid for, or are enticed into purchasing something they don’t get. The basic premise behind false advertising claims is that consumers have the right to know what they are buying and to rely on statements from the seller as truthful.

False advertising claims are governed both by state and federal law. Elements of state-law claims for false advertising may include showing that the defendant advertised in a manner that was false or deceptive, the plaintiff was actually deceived by the advertising, the deception influenced purchasing decisions, and statements of the advertising defendant caused damages.

In addition to governing trademark infringement, the Lanham Act is the federal law governing false advertising claims. In order for the Lanham Act to apply, the false advertising must have a “substantial effect” on interstate commerce. In addition, the act requires that the advertising “misrepresent the nature, characteristics, qualities, or geographic origin” of the goods or services. Liability occurs when the plaintiff is “likely to be” damaged. The potential remedies under the Lanham Act include injunctive relief, monetary damages, retraction of the false advertising, and attorney fees.

There are several commonly recurring defenses for false advertising claims. Statements that are opinion rather than false expressions of fact are not actionable. Mere puffery is also a defense. Exaggerated statements upon which a reasonable buyer would not rely are not actionable. For example, advertising that the use of a particular product will “change your life” would not constitute false advertising. In addition, risk management may be the best defense. Many carriers are providing risk management advice to insureds as an ancillary service to coverage. One method of greatly reducing the potential for false advertising claims is to obtain a legal review of any marketing or advertising plans prior to publication. Compliance training is also an effective tool to prevent these claims.

Although there are a variety of policies available for advertising injury claims, the basic coverage is found in Part B of the ISO commercial general liability (CGL) policy. There is a good bit of case law involving coverage issues for advertising liability, and it could easily be the subject of another article. “Advertising injury” is typically defined in CGL policies as a publication (oral or written) that slanders or libels another, invades a right of privacy, misappropriates advertising ideas, or infringes on copyright, slogans, or trademarks. The 2013 amendments to the ISO CGL policy restrict claims for invasion of privacy when they involve a data breach or cyber liability claims. Insureds may need to evaluate purchasing additional coverage for those claims. Common exclusions under coverage include advertising injury that occurs as the result of a breach of contract, intentional distribution of false information, claims involving intellectual property, and electronic communications in many cases.

In addition to the Lanham Act and other state-law claims, the Federal Trade Commission (FTC) enforces truth-in-advertising laws on behalf of consumers—the requirements became law in 2000. The FTC will file suit in federal court often for injunctive relief, to freeze funds obtained by scams and other fraud, and to obtain compensation for victims. Claims by insureds for coverage may involve prosecution by the FTC, so you need to be aware of the commission’s ability to pursue violations.

Because advertising reaches a broad audience by nature, false advertising claims may be subject to class-action litigation. Although the actual damages and recovery by the individual consumer may be minuscule, the overall cost of this litigation is massive and can involve excess and reinsurance polices. They typically do not include claims for personal injuries but, rather, serve the purpose of protecting a class of individuals affected in the same way by deceptive or false practices of the seller. State attorneys general will also take on the protection of their consumers under state regulatory schemes.

The right false advertising claims can be very attractive to plaintiff’s attorneys, particularly in the class-action context. They require very little workup in terms of expert testimony. Individual (non-class) claims can be handled with minimal expense. Defending these claims requires expertise in this area both by the claims professional and local counsel. In addition, significant knowledge regarding the good or service at issue is necessary to evaluate and defend these claims effectively.